NACCO Industries, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. Unaudited results cover NACoal (mining), Hamilton Beach Brands (HBB; appliances), Kitchen Collection (KC; specialty retail), and the parent and other operations. HBB and KC are seasonal, so first-quarter performance may not indicate full-year results.
Consolidated financial results
| Metric | Q1 2016 | Q1 2015 |
|---|---|---|
| Revenue | $173.4 million | $193.7 million |
| Gross profit | $40.0 million | $38.2 million |
| Operating profit | $5.4 million | $3.2 million |
| Net income | $2.8 million | $1.0 million |
| Diluted EPS | $0.41 | $0.14 |
| Operating cash flow | $(3.8) million | $37.5 million |
Revenue declined 10.5%, while gross profit increased 4.8%. Gross margin rose to approximately 23.1% from 19.7%; operating margin increased to 3.1% from 1.7%. Net margin was approximately 1.6%, versus 0.5%. Earnings included $12.6 million from unconsolidated mines, compared with $12.6 million a year earlier.
- Cash flow and liquidity: Cash and equivalents were $35.7 million at March 31, down from $52.5 million at year-end 2015. Operating cash use was driven in part by working-capital movements, including accrued-payroll payments; investing cash use was $3.3 million, including $4.4 million of consolidated capital expenditures. Current assets were $315.8 million and current liabilities $140.8 million, for a current ratio of approximately 2.2.
- Debt: Consolidated debt was approximately $163.2 million, down from $170.0 million at year-end; this includes subsidiary debt not guaranteed by the parent. NACCO reported a 45% debt-to-total-capitalization ratio. Subsidiaries reported compliance with their financial covenants. Reported unused availability was $123.9 million at NACoal, $45.3 million at HBB, and $14.0 million at KC.
- Equity and distributions: Stockholders’ equity was $202.0 million, versus $201.1 million at year-end. Quarterly dividends were $0.2625 per share.
Segment performance and changes
- NACoal: Revenue fell to $30.3 million from $41.3 million, primarily because Centennial ceased coal production in Q4 2015 and MLMC sold fewer tons amid customer power-plant outages. Operating profit rose to $9.7 million from $5.2 million, supported by the end of Centennial production, lower MLMC costs, and higher limerock deliveries. Net income increased to $8.3 million from $4.5 million. Total coal tons sold were 7.8 million in both periods; limerock deliveries increased to 6.8 million cubic yards from 4.5 million.
- HBB: Revenue declined 6.1% to $115.7 million; operating profit fell to $0.1 million from $2.2 million, and HBB recorded a $0.3 million net loss versus $0.6 million net income. Lower sales volume and a shift toward lower-priced, lower-margin products, along with adverse currency movements, weighed on results.
- KC: Revenue decreased to $28.4 million from $30.0 million. The operating loss improved to $2.9 million from $3.0 million, while the net loss was approximately $1.9 million in both periods. Store closures and weaker comparable-store sales contributed to lower revenue; KC operated 222 stores at quarter-end.
Outlook, risks and contingencies
- NACoal outlook: Management expects coal tons sold to increase in 2016, but expects pretax income, excluding Centennial in both comparison years, to decline, principally because lower diesel-linked indices are expected to reduce MLMC contract revenue. Newer unconsolidated mines and higher limerock deliveries are expected to partly offset this pressure. Capital expenditures are estimated at $15.2 million for 2016. Centennial continues wind-down and reclamation; future impairment charges are possible.
- HBB outlook: Management expects modestly higher 2016 revenue and higher net income than in 2015, assuming consumer spending meets expectations. Currency effects may offset some volume gains. Full-year capital expenditures are estimated at $7.9 million. Results remain exposed to retail demand, product mix, foreign exchange, input costs, and product acceptance.
- KC outlook: Management expects 2016 revenue and results to decline slightly from 2015, with positive but substantially lower cash flow before financing than in 2015. Consumer traffic shifts to online shopping, weak spending, and border-market currency effects remain headwinds.
- Notable contingencies: In Ohio Dormant Mineral Act litigation, the company said it could be required to repay up to $4.5 million in royalties if it loses certain claims. HBB had accrued $9.3 million for environmental investigation and remediation and estimated reasonably possible additional costs of $0 to $5.4 million. NACoal’s Coyote Creek guarantees could create exposure in specified circumstances; management considered performance remote and recorded no liability.
- Other considerations: The company reported no material change in risk factors and effective disclosure controls. Centennial’s asset disposals and reclamation, mine delivery timing, energy-market and regulatory changes, HBB currency and consumer-demand exposure, and KC store-level trends are key uncertainties. Interest-rate and foreign-exchange sensitivity analyses indicated no material impact under the stated hypothetical scenarios.
Investor verification priorities
- Track whether NACoal’s new-mine deliveries begin on schedule and whether lower diesel-linked indices reduce MLMC earnings as expected.
- Monitor Centennial reclamation cash costs, asset-sale proceeds, and any impairment charges.
- Assess HBB’s sales recovery, margins, currency exposure, and execution of new-product initiatives against its full-year outlook.
- Check KC comparable-store sales, liquidity, and progress toward its expected positive full-year cash flow before financing.
- Follow developments in the Ohio mineral-rights litigation and HBB environmental remediation costs.
- Reconcile segment-level cash needs, facility availability, covenant compliance, and consolidated cash-flow conversion as seasonal activity progresses.